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Spitzer v.Grasso, mano a mano

Spitzer, the NY attorney general with a nack for making headlines at the expense of financial industry executives, and Grasso, the former kingpin of the NYSE, have been trading shots in the press the past few days. Spitzer has sued Grasso over his $200m parting gift from the exchange. The Washington Post has a blow by blow account.

In the WSJ ($), Holman Jenkins takes a look at the case. Jenkins' columns are always interesting even when they are speculative because his opinions combine analysis with information ignored by the average columnist. At the core of Spitzer's theory is the assertion that the NYSE board was uninformed, and essentially duped by Grasso when they voted to award him his millions.

New York nonprofit law .. requires compensation to be reasonable and commensurate with services performed. We'll see what a court has to say about that. The NYSE may be organized as a nonprofit, but somebody might take a look at the vast revenues that flowed through the exchange for the benefit of its seat owners, the real pot of money Mr. Grasso was charged with guarding.

In fact, the NYSE makes a lousy proxy for concerns about corporate compensation. It represents a completely different kettle of guppies than the typical Berle & Means quandary of dispersed, impotent owners and all-powerful, unaccountable management. The NYSE is owned by seat holders who show up on the premises every business day. Their livelihood depends on the place. They elect its board. They know what a telephone is for. They have every means and incentive to wield their collective clout to make sure their interests are being served.

Now some NYSE "specialist" firms will tell you they were afraid of Mr. Grasso; they didn't really know what was going on. If pressed on why they bungled a matter so close to their own interests, they shrug their shoulders like an errant teenager and say they aren't sure why they didn't keep a closer check on things.

So we'll answer for them: They stood back because Mr. Grasso was serving their needs marvelously. Consider the years 1995 through 2000, when the handful of small, little-known businesses that control floor trading pocketed profits of $2.12 billion. The average yearly return on their invested capital: a princely 21.35%. Mr. Grasso's retirement payoff after 35 years at the exchange may have been gross and unsightly, but it was a small fraction of the riches he helped to preserve for the New York Stock Exchange's most privileged constituents....

For his part, Mr. Spitzer has intimated that he didn't really want any part of the Grasso mess; it was dropped in his lap by John Reed. We have no trouble believing it. New York's Attorney General, heir to a local real estate fortune, has specialized in presenting his wealthy business targets with both a problem and a solution, the latter involving writing a big check with their firm's money. He may not exactly provoke gratitude (except among CEOs more than usually afflicted with Stockholm Syndrome) but he's seen as someone with whom business can be done.

His political ambition is zeppelin-like, lurching over Manhattan in unmoored, alarming fashion. He was obviously eager here to limit his political risk by portraying the NYSE's famous board as victims rather than culprits in the Grasso pay scandal. But no judge or jury will fail to understand that he's giving them a pass for his own political interests.

Mr. Grasso understands this too, and has semaphored that he will drag them into court, forcing them to choose between pleading gullibility, inattention and incompetence or undermining Mr. Spitzer's case. True, even a court victory might not get Mr. Grasso his good name back, but more than a few would applaud his show of resistance to a budding demagogue.

If Jenkins is correct, Grasso's verbal salvos can be interpreted as a signal that he's not going to accept Spitzer's typical deal, at least not anywhere near the expected terms. He's threatened a $50m countersuit, with the proceeds to be donated to charity. That suggests the makings of a potential settlement, but I'm betting we'll see a few more rounds before the case gets to that point.